Innovation/Global Crisis Blog

 Barclays Bank:  Disruptive Management Innovation?

By Shlomo Maital

      Clayton Christensen (Harvard Business School) became famous for his concept of disruptive technology:  new technology that changes the rules of the game in industries.

     Perhaps there is also disruptive management innovations.  And Barclays Bank may be implementing one.

     The BBC reports that Barclays will defer its bonuses to its 130,000 employees worldwide: 

Barclays is to defer paying bonuses earned this year to its directors and senior staff for up to three years.  The BBC understands the payments for last year have not been set, but when they are will be paid out mostly in shares in staggered form up to 2013.

Barclays did not receive any money directly from UK taxpayers during the financial crisis.  However it did sell a notable share of its business to the government of Abu Dhabi. The bank will tell its 130,000 staff over the next few weeks that while they will be getting a bonus, almost all of it will be deferred over the next three years – and this will be the new ongoing policy.

   Until now,  American investment banks and some commercial banks have stubbornly insisted:  Unless we pay huge bonuses to our top talent, they will quickly leave, join other banks, and make money for them rather than for us.   High bonuses are an essential part of the banking landscape.  No-one can endure or prevail without paying them.

    Now comes Barclays, which took no UK government bailout money (though it did raise money from Abu Dhabi), and seems to be trying to change the rules of the game.  By making bonuses payable in shares, over a 3-year period, they create incentives for less short-run risk-taking and more long-run profit-building.

    Let us wish Barclays well. Their experiment is very important, far more important than the UK government’s 50 per cent windfall tax on bonuses, or President Obama’s windmill-tilting threat to break up large US banks.   If Barclays succeeds, restores its financial health, makes sustained profits and thrives, and if Barclays manages to retain top talent (or, more important, attract top talent who believe in a more sustainable, long-run ethical approach to banking),  it will comprise a disruptive management innovation that other more feckless banks may be forced to adopt.

    Darwinian experiments of this sort are far more effective than government regulation.